A charter for home-buyers

The new code for mortgage lenders should provide more protection. Nic Cicutti reports

Virtually lost in the mass of stories related to the Budget this week was the introduction of a new Code of Conduct aiming to protect millions of future home-buyers.

The Code of Mortgage Lending Practice, which came into effect on Monday, sets out minimum standards that lenders must operate both in respect of how they advise their customers and the way they operate their accounts.

The Code, issued by the Council of Mortgage Lenders (CML), also requires all members of that body, which represents the overwhelming majority of the industry, must belong to an independent complaints system, free of charge to users.

Its introduction comes as the Labour government considers whether there is a need for mortgage lending to be brought under statutory regulation, similar to rules governing the sale of life and pension products. This was promised by the previous City spokesman, Mike O'Brien, before the election, but there has been little mention of this since 1 May. The CML has opposed statutory controls.

One important part of the Code sets out three different levels of service which might be provided by lenders in the selling of mortgages. Borrowers must be told which, or all, of the three services their lender is able to provide.

The first relates to supplying information only on mortgage products chosen by borrowers. Here, the assumption will be that borrowers take responsibility for their choice and are assumed to have properly researched the market prior to making it.

The second involves providing information on the full range of that lender's products, while the choice still remains in the hands of the borrower.

The third level of service involves giving advice and product recommendations. Lenders must be able to explain why they are promoting one mortgage product over another. The advice, which may initially be verbal, must also be made in writing.

For instance, a young couple who wish to set up funds but do not have many assets might be steered towards a cashback mortgage to allow them to decorate and furnish their property.

Similarly, someone who expresses a wish for security and initially low capital repayments could be recommended a fixed mortgage. In both cases, such advice will need to be justified with reference to the borrowers' needs.

Michael Coogan, director-general at the CML, believes the Code is a step forward: "It is designed to be easy to use and tells consumers exactly what they should expect to receive as a minimum standard.

"We remain convinced that this self-regulatory approach to mortgages can provide a level of consumer protection which is at least as effective as legislation and much less bureaucratic and costly."

The problem with the Code, however, is that while lenders have formally accepted its provisions, the first port of call for most borrowers is the intermediary market - brokers, solicitors, estate agents, independent financial advisers and others.

While 72 per cent of borrowers went direct to lenders in 1980, this fell to 62 per cent in 1995/96, according to the CML. Anecdotal evidence suggests the proportion has dropped still further, to about half of all mortgages. Intermediaries are under no obligation to follow the Code although some do.

The CML says discussions are under way to extend the Code to intermediaries, while a list of those who are prepared to back it is being complied. The aim will be to bring them under the Code's wing by next spring.

Some lenders, including Nationwide Building Society, are preparing to deal only with brokers and others who themselves support the Code.

Unless intermediaries are brought in and - equally importantly - are made to disclose the extent to which they gain from the sale of mortgage- related products, including endowments, PEPs and home insurance, the prospect of legal intervention is likely to haunt lenders.